Tina Verpaelst inspects a steering wheel for a Chrysler Minivan at the Windsor Assembly plant in 2011. (Fabrizio Costantini/Getty)

Should the federal and Ontario governments be investing more in automotive? A recent report by the Office of Automotive and Vehicle Research thinks so. I think there is a very strong case for additional spending in automotive—but not for the positive reasons that the Office describes.

The economic rationale behind government spending in the automotive industry is significantly different than the Ontario government’s Cisco deal. A deal with Chrysler is largely defensive, to ensure the continued existence of the industry in southwestern Ontario.

Pete Mateja of that Office of Automotive and Vehicle Research is quoted as saying “The Chrysler Windsor plant, we definitely need to hold on to it or it’s going to be devastating for Windsor.” The loss of the Chrysler’s Windsor Assembly would put nearly 5,000 out of work directly, and thousands more indirectly, as Chrysler’s parts suppliers would follow with their own layoffs and closures. Those thrown out of work would have difficulty finding new jobs, as their existing skillsets are not otherwise in demand, a phenomenon economists refer to as structural unemployment.

High rates of unemployment have a budgetary cost to governments, from direct spending on employment insurance to a rise in health care costs as chronic unemployment diminishes mental and physical health. Since governments are going to have to spend significant amounts of money if the plant closes, why not simply pay to keep the plant open instead?

This “why not pay to keep the plant open” argument has been frequently used to rationalize government spending in automotive, most notably the U.S. Chrysler bailout of 1979. In the short run, this spending works as designed: the plant stays open, cars get produced, older workers retire with pensions and benefits and young workers are hired to replace them. The company, however—knowing that the spectre of structural unemployment still exists if the plant were to close—is always in the position to ask for more money by threatening to leave the jurisdiction. The initial government investment did not solve the structural unemployment issue so much as transfer it from one generation to the next. Current government investment in automotive creates the conditions for future structural unemployment, creating a cycle of corporate dependency on government.

It may be possible to structure these deals to avoid the dependency cycle. This cycle can only be broken if no young workers are locked into a system where they acquire a skillset that will not be in demand if the factory closes. My somewhat tongue-in-cheek suggestion has always been that any company taking money from government on such grounds not be allowed to hire anyone under the age of 45. I am uncertain if that is practical (or even constitutional), but there may be more subtle ways of accomplishing the same thing. One such way is by structuring the government “investment” in the form of a wage subsidy, where only workers with 15 or more years of experience are eligible for the subsidy.

We often hear that banks that are too big to fail are too big (or risky) to exist. The same clearly holds true for some automotive plants, which have gotten this size with the help of government handouts. But governments are not currently in a position to start saying no. The cost of high levels of structural unemployment is simply too high to allow automotive manufacturing to disappear overnight. Rather, a strategy for a controlled exit is needed, where government helps support existing workers while preventing a next generation of structural unemployment from emerging.

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For Canada and Ontario’s sake, governments have to step in again to save that industry which is shifting badly to Mexico.

Paul Desbiens on April 9, 2014 at 3:10 pm

The industry does not need to be saved, as the article states that will just lead tot the industry needing to be saved in 10 years and 20 years and 30 years and so on. Eventually Governments will have to let that industry die because Canada simply is not competitive in it.

What needs to be saved are the people that work in that industry through a soft landing mechanism; perhaps funding the industry with caveats of retraining, and not bringing a new generation into an industry that can’t survive without government help decade after decade.

Watson S on April 9, 2014 at 5:50 pm

I can’t understand why someone would publish an article such as this apparently without doing any research. Clearly this is politically motivated. The US Chrysler “Bailout” in the early 80’s was actually a loan, which Chrysler paid back in full plus interest well ahead of schedule. This is also the case for the 2009 “Bailout” which was done in exchange for stock which both the US, and Canadian Government sold for significant profits over and above their initial INVESTMENT. As for a controlled exist as you suggest, the result is the same, only the timing changes…. It is not like they will cut 1000 jobs every 2 years till it closes. It is a plant, ALL or nothing. 5000 working when plant runs, lay off 1000 plant closes. What you propose is the elimination of every manufacturing job in the country. Yup all of ’em. guess you who apparently are not in manufacturing and the rest of your office buddies will have to pick up the tab for the lions share of us unemployed. The fact of the matter is manufacturing is NEEDED in this country or we fish, cut trees and mine. Sending raw goods to the manufacturing countries. This will make Canada a third world country, as there will not be enough employment to support the economy. It will drive down labour costs first, then house values… Hey just like Mexico, except colder… Governments supporting industry is now a fact of life. The US heavily subsidizes Large manufacturing plants in order to attract them and keep them in their States. Canada has to do the same so long as everyone else is. This is typically in the form of tax exemptions/reductions, free land, reduced hydro etc. To fix this petitioning the international community is the only possible option which can change this… So we’d all better used to Gov Subsidies, stopping them here only hurts Canada…. And get your head out of the sand,

Gary Bovard on April 10, 2014 at 10:07 am

I would personally favor Google. Both FB and Google would benefit from it, but we would almost certainly benefit more from Google taking it over. In the case of Google+ it is just a matter of time. Facebook was lucky it didn’t genuinely need to compete with something as “good” as facebook, the competition was just lacking a lot of features and a global approach.Google+ is superior to Facebook, but it surely has a bigger challenge for getting popular.Just examine VHS and Betamax. Betamax was better but lost due to bad marketing/licensing.Danny recently posted..Black & Decker NPP2018 18-Volt Cordless Electric Pole Chain Saw